As the connected world expands, we re asking ourselves a critical question: How do we make a difference for the people who count on us every day?

Transcription

1 2015 Annual Report

2 As the connected world expands, we re asking ourselves a critical question: How do we make a difference for the people who count on us every day? This leads us to a simple, powerful truth: the digital world has made consumers a promise of a better, more connected life, and we re the ones delivering it. We help make businesses better partners for their customers. We help students explore worlds beyond their classrooms Annual Report

3 We deliver the promise of the digital world. 1

4 2 Financial highlights Financial highlights as of December 31, 2015 Consolidated revenues (in billions) Operating cash flows from continuing operations (in billions) Reported diluted earnings per share $120.6 $127.1 $131.6 $38.8 $30.6 $38.9 $4.00 $4.37 $ Adjusted diluted earnings per share (non-gaap) $2.84 $3.35 $3.99 Dividends declared per share $2.09 $2.16 $ Corporate highlights $21.2 billion in free cash flow (non-gaap) 3.6% growth in operating revenues 2.7% annual dividend increase million wireless retail connections 4.0 million wireless retail net additions* 35.7 million wireless retail postpaid accounts 0.96% wireless retail postpaid churn 42.5% wireless segment EBITDA margin (non-gaap) 4.6% growth in wireless total operating revenues 418,000 Fios Internet subscriber net additions 178,000 Fios Video subscriber net additions 8.6% growth in Fios revenues 3.5% growth in wireline consumer retail revenues *Excludes acquisitions and adjustments Note: Certain reclassifications have been made, where appropriate, to reflect comparable operating results. See Investor Relations ( for reconciliations to U.S. generally accepted accounting principles (GAAP) for the non-gaap financial measures included in this annual report. Forward- Looking Statements. In this report, we have made forward- looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward- looking statements include the information concerning our possible or assumed future results of operations. Forward- looking statements also include those preceded or followed by the words anticipates, believes, estimates, hopes or similar expressions. For those statements, we claim the protection of the safe harbor for forward- looking statements contained in the Private Securities Litigation Reform Act of The following important factors, along with those discussed in our filings with the Securities and Exchange Commission (the SEC ), could affect future results and could cause those results to differ materially from those expressed in the forward- looking statements: adverse conditions in the U.S. and international economies; the effects of competition in the markets in which we operate; material changes in technology or technology substitution; disruption of our key suppliers provisioning of products or services; changes in the regulatory environment in which we operate, including any increase in restrictions on our ability to operate our networks; breaches of network or information technology security, natural disasters, terrorist attacks or acts of war or significant litigation and any resulting financial impact not covered by insurance; our high level of indebtedness; an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations or adverse conditions in the credit markets affecting the cost, including interest rates, and/or availability of further financing; material adverse changes in labor matters, including labor negotiations, and any resulting financial and/or operational impact; significant increases in benefit plan costs or lower investment returns on plan assets; changes in tax laws or treaties, or in their interpretation; changes in accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings; and the inability to implement our business strategies. In keeping with Verizon s commitment to protect the environment, this report was printed on paper certified by the Forest Stewardship Council (FSC). By selecting FSC-certified paper, Verizon is helping to make a difference by supporting responsible forest management practices Annual Report

5 Corporate responsibility highlights 3 Corporate responsibility highlights Education We transform learning. We re creating hands-on, technology-based programs that equip young people with skills to succeed in jobs of the future. 100k students 60% Extending our reach We provided technology access and opportunities to more than 100,000 students in all 50 states. Increased tech interest Winners of our Verizon Innovative App Challenge were more interested in computer programming. 56% Improved tech skills Students in our Verizon Innovative Learning Schools (VILS) program got better at using technology. 37% Increased engagement Students in our VILS program were more engaged with their subjects. Sustainability A connected world is a more sustainable world. We re reducing our carbon emissions and our customers footprints. Carbon intensity reduction progress through Baseline 18% 29% 31% 40% 40% Goal 50% Cutting carbon We kept working toward our goal of cutting our carbon intensity in half by million Reducing emissions Our IoT solutions reduced customer greenhouse gas emissions equivalent to taking more than one million cars off the road. American Business Act on Climate Pledge Climate pledge We signed on to support clean energy, reduce waste and minimize our environmental footprint Annual Report

6 4 Chairman s letter Dear Shareowner, In periods of rapid change, the most important question a corporate leader can ask is, are we the company we need to be for the future? We have asked ourselves that question many times throughout Verizon s history, and we ve responded with forward- looking actions that have kept us at the forefront of our industry. Anticipating the mobile revolution, we built the nation s best wireless network. Recognizing that fiber would overtake copper, we led the transition to broadband. Seeing that video was going mobile, we invested in wireless capacity and added to our skill set in digital video. At each inflection point, we ve demonstrated our ability to use periods of industry disruption to create new sources of growth, while still delivering on the fundamentals on which Verizon is built. The result has been a remarkably durable record of growth and profitability in a rapidly transforming industry. In 2015, the pace of change in communications accelerated, driven by fundamental shifts in technology, industry structure and demographics. Once again, we face hard questions about how to transform our company to compete and grow in this new environment and, once again, we ve stepped up to the challenge of positioning Verizon to be an innovator in the digital-first mobile future while delivering another year of strong operating and financial performance. Let me share the highlights of this transformational year. Delivering innovation Our strategy for continued growth and profitability is straightforward: deliver great wireless and wireline services over our superior networks, develop new business models in platforms such as video and the Internet of Things, and create incremental revenue opportunities in applications and content. We delivered on all elements of this three- tiered strategy in The U.S. communications marketplace continues to show its strength in a changing environment, as we see in both our wireless and wireline businesses. Mobile and broadband usage is growing, driven by demand for data and video. Verizon s base of high- quality customers also continues to grow. We ended 2015 with million retail wireless connections, 7 million Fios Internet subscribers and 5.8 million Fios Video subscribers, with strong demand for smartphones, tablets and our high-speed Fios Quantum service. This steady demand for mobile and consumer broadband fueled our revenue growth in Total operating revenues were $131.6 billion, an increase of 3.6 percent over Most important, as video, music and commerce all migrate to mobile and digital platforms, our services are more embedded in customers lives than ever before. Therefore, Job #1 for Verizon is reinforcing the network superiority that is the defining characteristic of our brand. In 2015, we invested approximately $28 billion in capital and spectrum licenses to increase the future capacity of our wireless network, fill out our all-fiber network in the Boston-to- Washington corridor and enhance our global Internet backbone. Our leadership in 4G LTE wireless technology has enabled us to keep 2015 Annual Report

7 Chairman s letter 5 ahead of the rapid increase in wireless data traffic, about 90 percent of which now rides on the 4G LTE network. In wireline, customers are taking advantage of the tremendous capacity of our fiber-to-the-home Fios network, with more than 70 percent of consumer Fios customers subscribing to speeds of 50 megabits per second or higher. Our commitment to network excellence has kept us at the top of Root Metrics rankings of wireless reliability, speed and network performance for five years in a row. Also, Fios Internet ranked highest among Internet Service Providers in a recent J.D. Power survey of customer satisfaction for three out of four regions of the country. Verizon intends to lead the way to the 5G world. By enhancing our networks with fiber, small cells, in- building systems, antennas and other capacity- boosting technologies, we re not only increasing our ability to meet today s surging demand for wireless data and video, we re also getting our network ready for 5G wireless technology. This has the potential to substantially increase the throughput and responsiveness of wireless networks. As we have done with previous technology shifts in network architecture, Verizon intends to lead the way to the 5G world and has already begun to work with technology partners to develop the standards and market applications that will drive deployment. We expect to conduct trials of 5G in 2016 and move aggressively to commercial deployment thereafter. We believe that 5G will be the foundation for a new wave of growth and consumer benefits in such areas as mobile video, smart cities and other applications under development. We ve historically had a two-year advantage on our competitors when it comes to network advances, and we re investing to make sure that this remains a source of competitive advantage. Better matters One of the most important metrics for us is customer loyalty. In the wireless business, this is expressed as the percentage of customers who leave, or churn, for another carrier every month. I m proud to report that our 0.96 percent churn rate led the industry in We see this as evidence that, in the words of our new brand campaign, better matters not just with respect to network quality, but the entire customer experience. While there s no doubt that customers value what Verizon provides, it s also clear that what customers want is changing rapidly. In particular, millennials who have now surpassed the Baby Boomers as the largest segment of the U.S. population behave very differently than traditional customers when it comes to managing their digital Wireless revenues (in billions) Wireless retail connections (in millions) 4G LTE devices (in millions) $81.0 $87.6 $ Annual Report

8 6 Chairman s letter lives: they view most of their video online, discover most of their content on a mobile device and put a premium on services that are digital-first, ondemand and personalized to their individual needs. We cannot succeed with these new customers by doing more of the same; rather, we need to innovate and evolve our products around what the digital-first customer wants. To start with, we are using our better matters mantra to examine the way we interface with customers at every touch point from the experience in our stores to the buying process on our website and are making it easier for customers to transact more of their business with us online. We listened to customers frustration with the 300- channel bundle of TV stations that bloat the traditional cable package and introduced a smaller bundle called Custom TV that now accounts for about one-third of Fios Video sales. We simplified complicated wireless price plans and data packages into easy-to- understand buckets labeled Small, Medium, Large and X-Large. We know we have much more work to do to make ourselves easier to do business with, but this is a healthy process that s helping us clear out the obsolete or overly complex practices that have grown up in our business and focus on what s most important to customers. We have also come together around a simple, powerful purpose: to deliver the promise of the digital world. We deliver on that promise every day by connecting millions of customers to what they need most and providing the infrastructure that makes the global economy work. Moreover, we re using our resources to help create the next generation of innovators. Through the Verizon Foundation, we work with educators across the country to create hands-on, technology- driven models for learning that are showing great promise in equipping young people for the jobs of the future. Our programs help students develop specific skills like coding, as well as the broader life skills of critical thinking, collaboration and entrepreneurship. As a result, young people in these programs are more interested in studying science, technology, engineering and math, and in pursuing careers in these areas. Education is just one social challenge being transformed by the possibilities of smart technologies. For more on what we re doing to create smarter, more sustainable communities, see our 2015 Corporate Responsibility Report. On the strategic front, we made a major move in the mobile media marketplace by acquiring AOL in June With AOL, we now have a highly sophisticated mobile advertising platform, as well as popular online content like the Huffington 2015 Annual Report

9 Chairman s letter 7 Post, Engadget and TechCrunch. We also launched a mobile-first social entertainment platform called go90, with content aimed at the millennial customer an app we ve described as Hulu meets Twitter. Go90 offers customers a whole different experience than they get from linear TV and, while it s early in the game, we have been able to strike content deals with such partners as the NFL, the NBA, Awesomeness TV, Vice Media and major advertisers who are interested in reaching the young, highly mobile viewer who may not subscribe to traditional video services. With the global market for mobile commerce already at $48 billion and growing, the intersection of digital and mobile represents a significant incremental growth opportunity for Verizon. The other new business opportunity for us is the Internet of Things (IoT), which brings connected solutions to the physical environment. Already, IoT is creating a new revenue stream for Verizon, with revenues of about $690 million in 2015, up 18 percent year over year. We have a strong and growing presence in the field of telematics through which we help companies manage large fleets of vehicles and provide connected car services to manufacturers such as Mercedes Benz. We launched several products in this space in 2015, including hum, a connected car solution; GridWide, a smart energy product; Intelligent Lighting, which manages lighting in cities and industrial sites; and an agricultural technology solution that manages water resources and monitors crop conditions in large farms. We also created a platform called ThingSpace for developers of IoT applications, which enables developers to use our 4G LTE network to launch their products. ThingSpace is already hosting more than 4,000 developers, in just its first few months of operation. These moves into digital video and IoT build on a foundation we ve laid with several years worth of strategic acquisitions and business development. IoT is creating a new revenue stream for Verizon. They also leverage our concerted efforts to accelerate our innovation flywheel by establishing product development groups in Silicon Valley and Los Angeles to augment our existing Innovation Centers in Waltham, Massachusetts and San Francisco. Because we anticipated the shift to mobile video, we are now a leader in the complex art of delivering advertising and video content in a TV- everywhere world. Our core wireless and wireline businesses benefit from these efforts also, as we continue to add to our product lineup with enhancements such as Fios Custom TV. We are just at the beginning of the evolution to mobile-first video and IoT deployment. As these platforms Fios Internet subscribers (in millions) Fios Video subscribers (in millions) Wireline consumer retail revenue (in billions) $14.8 $15.6 $ Annual Report

10 8 Chairman s letter become widespread, they will drive more and more traffic on our wireless and broadband networks. More broadly, they will be the central ecosystem for technology development, unleashing a cascade of innovations with the potential to make our lives richer and our society safer and smarter in such fields as healthcare, education, energy management and smart cities. Also, the markets for these services are global, giving us a new, less capital- intensive path to expand the Verizon brand globally. For all these reasons, we believe these are big, scalable businesses that leverage our core assets and will contribute meaningfully to our growth in the next three to five years. Delivering results Underpinning Verizon s transformation is our continued attention to the fundamentals of the business. Thanks to our management team s unrelenting operational discipline and the incomparable dedication of our front-line employees, our wireless and wireline businesses are executing well, based on our core attributes of network quality, customer service and efficiency. The result is another year of growth and profitability. Cash flows from operating activities totaled $38.9 billion in 2015, compared with $30.6 billion in Adjusted EBITDA margin expanded year over year to 35.4 percent, evidence of our rigorous attention to improving the efficiency of our operating model and freeing up resources that can be used to move the business forward. Our strong cash flows support consistent investment in networks and a record of dividend increases that now stands at nine consecutive years. We re committed to setting the standard for excellence in our industry, now and in the future. We continued to sharpen our strategic focus in 2015 with the planned sale of some telecom properties to Frontier (expected to close at the end of the first quarter of 2016) and the monetization of certain tower assets. We used some of the proceeds to return value to shareowners in the form of an accelerated stock repurchase in 2015 and plan to further repay debt in Our balance sheet is strong, and we remain on target with the debt reduction outlined at the time of our acquisition of Vodafone s interest in Verizon Wireless. We are committed to returning to our pre- Vodafone transaction credit rating profile in the time frame. Adjusted earnings per share (EPS) for 2015 were $3.99, up 19.1 percent over $3.35 in adjusted EPS in Total return to shareowners for the year was 3.5 percent, which reflects more than $13.5 billion in dividends and stock repurchases and exceeds the performance of the Dow Jones Industrial Average and the S&P 500 for We remain confident in the performance of our core businesses and believe that our strategy of delivering strong operating results and creating new business models will fuel our growth over the long term. Delivering the future Not many companies can transform their businesses in a time of accelerating change. It requires a management team that can do many things at once: maintain a strong core business, bring totally new products and technologies to market, remain financially sound, and stay true to their values. While we haven t chosen the easy road, I am confident we will prevail as we have in the past because we re willing to disrupt the industry, rather than wait to be disrupted. Most of all, we will win because we have the two things that are essential to any company that succeeds over the long term: a strong, customer- centric culture and an essential role in making the world a better place. I am grateful to our leadership team and our Board for their courage and guidance through this exciting period of our history. Our employees embody the values at the heart of our Credo, and I continue to marvel at their dedication to customers and willingness to embrace change as we transform our company for the future. More change is coming, but no matter how fast the flywheel spins, we will remain true to the values and strengths that have made us great. We re committed to setting the standard for excellence in our industry, now and in the future. Our best years are ahead of us. Lowell McAdam Chairman and Chief Executive Officer Verizon Communications Inc Annual Report

11 Verizon Communications Inc. and Subsidiaries 9 Selected Financial Data (dollars in millions, except per share amounts) Results of Operations Operating revenues $ 131,620 $ 127,079 $ 120,550 $ 115,846 $ 110,875 Operating income 33,060 19,599 31,968 13,160 12,880 Net income attributable to Verizon 17,879 9,625 11, ,404 Per common share basic Per common share diluted Cash dividends declared per common share Net income attributable to noncontrolling interests 496 2,331 12,050 9,682 7,794 Financial Position Total assets $ 244,640 $ 232,616 $ 273,654 $ 222,911 $ 228,194 Debt maturing within one year 6,489 2,735 3,933 4,369 4,849 Long-term debt 103, ,536 89,658 47,618 50,303 Employee benefit obligations 29,957 33,280 27,682 34,346 32,957 Noncontrolling interests 1,414 1,378 56,580 52,376 49,938 Equity attributable to Verizon 16,428 12,298 38,836 33,157 35,970 Significant events affecting our historical earnings trends in 2013 through 2015 are described in Other Items in the Management s Discussion and Analysis of Financial Condition and Results of Operations section data includes severance, pension and benefit charges, early debt redemption costs and litigation settlement charges data includes severance, pension and benefit charges and early debt redemption costs. Stock Performance Graph Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecommunications Services Index and S&P 500 Stock Index $200 $180 $160 Dollars $140 $120 $100 $80 $60 Verizon S&P 500 Telecom Services S&P At December 31, Data Points in Dollars Verizon S&P 500 Telecom Services S&P The graph compares the cumulative total returns of Verizon, the S&P 500 Telecommunications Services Index, and the S&P 500 Stock Index over a five-year period. It assumes $100 was invested on December 31, 2010 with dividends being reinvested.

12 10 Verizon Communications Inc. and Subsidiaries Management s Discussion and Analysis of Financial Condition and Results of Operations Overview Verizon Communications Inc. (Verizon or the Company) is a holding company that, acting through its subsidiaries, is one of the world s leading providers of communications, information and entertainment products and services to consumers, businesses and governmental agencies. With a presence around the world, we offer voice, data and video services and solutions on our wireless and wireline networks that are designed to meet customers demand for mobility, reliable network connectivity, security and control. We have two reportable segments, Wireless and Wireline. Our wireless business, operating as Verizon Wireless, provides voice and data services and equipment sales across the United States (U.S.) using one of the most extensive and reliable wireless networks. Our wireline business provides consumer, business and government customers with communications products and enhanced services, including broadband data and video, corporate networking solutions, data center and cloud services, security and managed network services and local and long distance voice services, and also owns and operates one of the most expansive end-to-end global Internet Protocol (IP) networks. We have a highly skilled, diverse and dedicated workforce of approximately 177,700 employees as of December 31, To compete effectively in today s dynamic marketplace, we are focused on transforming around the capabilities of our highperforming networks with a goal of future growth based on delivering what customers want and need in the new digital world. Our three tier strategy is to lead at the network connectivity level in the markets we serve, develop new business models through global platforms in video and Internet of Things (IoT) and create certain opportunities in applications and content for incremental monetization. Our strategy requires significant capital investments primarily to acquire wireless spectrum, put the spectrum into service, provide additional capacity for growth in our networks, invest in the fiber optic network that supports our businesses, maintain our networks and develop and maintain significant advanced information technology systems and data system capabilities. We believe that steady and consistent investments in our networks and platforms will drive innovative products and services and fuel our growth. Our network leadership will continue to be the hallmark of our brand, and provide the fundamental strength at the connectivity, platform and solutions layers upon which we build our competitive advantage. Strategic Transactions Spectrum Auction In January 2015, the Federal Communications Commission (FCC) completed an auction of 65 MHz of spectrum in the Advanced Wireless Services (AWS)-3 band. We participated in that auction and were the high bidder on 181 spectrum licenses, for which we paid cash of approximately $10.4 billion. The FCC granted us these spectrum licenses in April Acquisition of AOL Inc. On May 12, 2015, we entered into an Agreement and Plan of Merger (the Merger Agreement) with AOL Inc. (AOL) pursuant to which we commenced a tender offer to acquire all of the outstanding shares of common stock of AOL at a price of $50.00 per share, net to the seller in cash, without interest and less any applicable withholding taxes. On June 23, 2015, we completed the tender offer and merger, and AOL became a wholly-owned subsidiary of Verizon. The aggregate cash consideration paid by Verizon at the closing of these transactions was approximately $3.8 billion. Holders of approximately 6.6 million shares exercised appraisal rights under Delaware law. If they had not exercised these rights, Verizon would have paid an additional $330 million for such shares at the closing. AOL is a leader in the digital content and advertising platform space. Verizon has been investing in emerging technology that taps into the market shift to digital content and advertising. AOL s business model aligns with this approach, and we believe that its combination of owned and operated content properties plus a digital advertising platform enhances our ability to further develop future revenue streams. See Note 2 to the consolidated financial statements for additional information. Access Line Sale On February 5, 2015, we announced that we have entered into a definitive agreement with Frontier Communications Corporation (Frontier) pursuant to which Verizon will sell its local exchange business and related landline activities in California, Florida and Texas, including Fios Internet and video customers, switched and special access lines and high-speed Internet service and long distance voice accounts in these three states for approximately $10.5 billion (approximately $7.5 billion net of income taxes), subject to certain adjustments and including the assumption of $0.6 billion of indebtedness from Verizon by Frontier. The transaction, which includes the acquisition by Frontier of the equity interests of Verizon s incumbent local exchange carriers (ILECs) in California, Florida and Texas, does not involve any assets or liabilities of Verizon Wireless. The assets and liabilities that will be sold are currently included in Verizon s continuing operations and classified as assets held for sale and liabilities related to assets held for sale on our consolidated balance sheet as of December 31, The transaction is subject to the satisfaction of certain closing conditions including, among others, receipt of federal approvals from the FCC and the antitrust authorities and state regulatory approvals. All federal and state regulatory approvals have been obtained. We expect this transaction to close at the end of the first quarter of Based on the number of voice connections and Fios Internet and video subscribers, respectively, as of December 31, 2015, the transaction will result in Frontier acquiring approximately 3.4 million voice connections, 1.6 million Fios Internet subscribers, 1.2 million Fios video subscribers and the related ILEC businesses from Verizon. Tower Monetization Transaction During March 2015, we completed a transaction with American Tower Corporation (American Tower) pursuant to which American Tower acquired the exclusive rights to lease and operate approximately 11,300 of our wireless towers for an upfront payment of $5.0 billion (the Tower Monetization Transaction). Under the terms of the leases, American Tower has exclusive rights to lease and operate the towers over an average term of approximately 28 years. As the leases expire, American Tower has fixed-price purchase options to acquire these towers based on their anticipated fair market values at the end of the lease terms. As part of this transaction, we sold 162 towers for $0.1 billion. We have subleased capacity on the towers from American Tower for a minimum of 10 years at current market rates, with options to renew. We have accounted for the upfront payment as deferred rent and as a financing obligation.

13 Verizon Communications Inc. and Subsidiaries 11 Management s Discussion and Analysis of Financial Condition and Results of Operations continued Wireless Transaction On February 21, 2014, we completed the acquisition of Vodafone Group Plc s (Vodafone) indirect 45% interest in Cellco Partnership d/b/a Verizon Wireless for aggregate consideration of approximately $130 billion (the Wireless Transaction). The consideration paid was primarily comprised of cash of approximately $58.89 billion and Verizon common stock with a value of approximately $61.3 billion. With full control of Verizon Wireless enhancing our operational efficiency, we believe we are well- positioned to meet the challenges of an increasingly competitive industry. See Note 2 to the consolidated financial statements for additional information. Business Overview Wireless In our Wireless business, revenues grew 4.6% during 2015 driven by a 54.4% increase in equipment revenue as a result of an increase in device sales, primarily smartphones, under the Verizon device payment program (formerly known as Verizon Edge), partially offset by a decline in device sales under our traditional fixed-term service plans. Customers on our fixed-term service plans have historically paid higher fees for their wireless service in exchange for the ability to purchase their wireless devices at subsidized prices. Under the Verizon device payment program, our eligible wireless customers purchase phones or tablets at unsubsidized prices on an installment basis (a device installment plan). Customers that activate service on devices purchased under the device payment program or on a compatible device that they already own pay lower service fees (unsubsidized service pricing) as compared to those under our fixedterm service plans. The increase in activations of devices purchased under the Verizon device payment program has resulted in a relative shift of revenue from service revenue to equipment revenue and caused a change in the timing of the recognition of revenue. This shift in revenue was the result of recognizing a higher amount of equipment revenue at the time of sale of devices under the device payment program. For the year ended December 31, 2015, phone activations under the Verizon device payment program represented approximately 54% of retail postpaid phones activated compared to approximately 18% during During the fourth quarter of 2015, phone activations under the Verizon device payment program represented approximately 67% of retail postpaid phones activated. At December 31, 2015, approximately 29% of our retail postpaid phone connections participated in the Verizon device payment program compared to approximately 8% at December 31, At December 31, 2015, approximately 42% of our retail postpaid phone connections were on unsubsidized service pricing. At December 31, 2015, retail postpaid connections were 4.4% higher than at December 31, 2014, with smartphones representing 84% of our retail postpaid phone base at December 31, 2015 compared to 79% at December 31, In August 2015, we launched a simplified shared data plan, the Verizon Plan, that offers customers various sizes of data packages that can be shared among up to 10 devices on a customer s account. New customers who wish to participate in this new plan can do so by purchasing a device from Verizon either under our device payment program or at full retail, or by using their own compatible device. In addition, our current customers have the option of either moving to the Verizon Plan, subject to certain restrictions, or keeping their existing plan. We are focusing our wireless capital spending on adding capacity and density to our fourth generation (4G) Long Term Evolution (LTE) network, which is available to over 98% of the U.S. population in more than 500 markets covering approximately 312 million people, including those in areas served by our LTE in Rural America partners. Approximately 91% of our total data traffic in December 2015 was carried on our 4G LTE network. We are investing in the densification of our network by utilizing small cell technology, in- building solutions and distributed antenna solutions. Densification enables us to add capacity to manage mobile video consumption and demand for IoT, as well as position us for future fifth- generation (5G) technology. In 2015, we announced our commitment to developing and deploying 5G wireless technology. We are working with key partners to ensure the aggressive pace of innovation, standards development and appropriate requirements for this next generation of wireless technology. Wireline In our Wireline business, revenues declined 1.8% during 2015 primarily due to revenue declines in Global Enterprise resulting from lower voice services and data networking revenues, as well as the negative impact of foreign exchange rates. To compensate for the shrinking market for traditional voice service, we continue to build our Wireline segment around data, video and advanced business services areas where demand for reliable high-speed connections is growing. The decrease in revenues in our Wireline segment was partially offset by revenue increases in Consumer retail driven by Fios. During the year ended December 31, 2015, Fios represented approximately 79% of Consumer retail revenue compared to approximately 76% in As the penetration of Fios products increases, we continue to seek ways to increase revenue and further realize operating and capital efficiencies as well as maximize profitability. As more applications are developed for this high-speed service, we expect that Fios will become a hub for managing multiple home services that will eventually be part of the digital grid, including not just entertainment and communications, but also IoT technology used to support wireless communications in areas such as home monitoring, health monitoring, energy management and utilities management. We continue to develop offerings on our Fios platform. During 2015, Verizon announced the introduction of Fios Custom TV, which offers customers the option of purchasing a package of channels that includes a base set of select national networks and local broadcast stations plus their choice of two sets of channels grouped into various content categories, such as news, sports and entertainment. Customers can add more sets of categorized channels to their Custom TV package for an additional monthly fee. As with all Fios TV packages, Custom TV customers also receive the Fios Local Package, which contains local versions of the Fox, CBS, NBCU, and ABC broadcast stations and other similar local content. Capital Expenditures and Investments We continue to invest in our wireless network, high-speed fiber and other advanced technologies to position ourselves at the center of growth trends for the future. During 2015, these investments included $17.8 billion for capital expenditures and $9.9 billion for acquisitions of wireless licenses. In addition, we acquired AOL to enhance our digital media and advertising capabilities. See Cash Flows Used in Investing Activities and Note 2 to the consolidated financial statements for additional information. We believe that our investments aimed at expanding our portfolio of products and services will provide our customers with an even more efficient, reliable infrastructure for competing in the information economy.

14 12 Verizon Communications Inc. and Subsidiaries Management s Discussion and Analysis of Financial Condition and Results of Operations continued Trends In the sections that follow, we provide information about the important aspects of our operations and investments, both at the consolidated and segment levels, and discuss our results of operations, financial position and sources and uses of cash. In addition, we highlight key trends and uncertainties to the extent practicable. The industries that we operate in are highly competitive, which we expect to continue particularly as traditional, non- traditional and emerging service providers seek increased market share. We believe that our high- quality customer base and superior networks differentiate us from our competitors and enable us to provide enhanced communications experiences to our customers. We believe our focus on the fundamentals of running a good business, including operating excellence and financial discipline, gives us the ability to plan and manage through changing economic and competitive conditions. We will continue to invest for growth, which we believe is the key to creating value for our shareowners. We are investing in innovative technology, like wireless networks and high-speed fiber, as well as the platforms that will position us to capture incremental profitable growth in new areas, like mobile video and IoT, to position ourselves at the center of growth trends of the future. Connection and Operating Trends In our Wireless segment, we expect to continue to attract and maintain the loyalty of high- quality retail postpaid customers, capitalizing on demand for data services and bringing our customers new ways of using wireless services in their daily lives. We expect that future connection growth will be driven by smartphones, tablets and other connected devices. We believe these devices will attract and retain higher value retail postpaid connections, contribute to continued increases in the penetration of data services and help us remain competitive with other wireless carriers. We expect future growth opportunities will be dependent on expanding the penetration of our network services, offering innovative wireless devices for both consumer and business customers and increasing the number of ways that our customers can connect with our network and services, and we expect to manage churn by focusing on improving the customer experience through simplified pricing and better execution in our distribution channels. Service and equipment pricing play an important role in the wireless competitive landscape. As the demand for wireless services continues to grow, wireless service providers are offering service plans that include unlimited voice minutes and text messages and a specific amount of data access in varying megabyte or gigabyte sizes or, in some cases, unlimited data usage at competitive prices. Some wireless service providers also allow customers to roll over unused data allowances to the next billing period. Furthermore, some wireless service providers offer price plans to new customers that undercut pricing under the customer s service plan with its current wireless provider. Some wireless providers also offer promotional pricing and incentives targeted specifically to customers of Verizon Wireless. Many wireless service providers, as well as equipment manufacturers, offer device payment options that decouple service pricing from equipment pricing and blur the traditional boundary between prepaid and postpaid plans. These payment options include device installment plans, which provide customers with the ability to pay for their device over a period of time, and device leasing arrangements. Historically, wireless service providers offered customers wireless plans whereby, in exchange for the customer entering into a fixed-term service agreement, the wireless service providers significantly, and in some cases fully, subsidized the customer s device purchase. Wireless providers recovered those subsidies through higher service fees as compared to those paid by customers on device installment plans. We and many other wireless providers have limited or discontinued the use of device subsidies. As a result of the increased penetration of device installment plans, we expect the number of customers on plans with unsubsidized service pricing to continue to grow in We compete in this area by offering our customers services and devices that we believe they will regard as the best available value for the price, while meeting their wireless service needs. In our Wireline segment, we have experienced continuing access line losses as customers have disconnected both primary and secondary lines and switched to alternative technologies such as wireless, voice over Internet protocol (VoIP) and cable for voice and data services. We expect to continue to experience access line losses as customers continue to switch to alternate technologies. We also expect Consumer retail revenues to increase, primarily driven by our Fios services, as we seek to increase our penetration rates within our Fios service areas. Despite this challenging environment, we expect that we will be able to grow key aspects of our Wireline segment by providing network reliability, offering product bundles that include broadband Internet access, digital television and local and long distance voice services, offering more robust IP products and services, and accelerating our cloud computing and IoT strategies. We will also continue to focus on cost efficiencies to attempt to offset adverse impacts from unfavorable economic conditions and competitive pressures. Operating Revenue We expect to experience revenue growth in our Wireless segment in 2016, primarily as a result of an increase in the sale of devices under the Verizon device payment program. The increase in activations of these devices with unsubsidized service pricing results in a relative shift of revenue from service revenue to equipment revenue and causes a change in the timing of the recognition of revenue. This shift in revenue is the result of recognizing a higher amount of equipment revenue at the time of sale of devices under the device payment program. As a result of the increased penetration of device installment plans, we expect the number of customers on plans with unsubsidized service pricing to continue to grow in We expect Fios broadband and video penetration to positively impact our Mass Markets revenue and subscriber base. Although we have experienced revenue declines in our Global Enterprise business, we expect our Global Enterprise business to be positively impacted by additional revenues from application services, such as our cloud, security and other solutions-based services and from continued customer migration of their services to Private IP and other strategic networking services. We believe the trend in these growth areas as well as our offerings in telematics and video streaming will help offset the continuing decline in revenues in our Wireline segment related to retail voice connection losses and the continued decline in our legacy wholesale and enterprise markets. We are focused on developing new products and services as well as commercial models in mobile video and the IoT to monetize usage on our networks and expand our revenue mix. Although we do not expect to realize material incremental revenues from these initiatives in 2016, we expect these initiatives will have a long-term positive impact on revenues.

15 Verizon Communications Inc. and Subsidiaries 13 Management s Discussion and Analysis of Financial Condition and Results of Operations continued Operating Costs and Expenses We anticipate our overall wireless operating costs will increase as a result of the expected increase in the volume of smartphone sales, which will result in higher equipment costs. In addition, we expect content costs for our Fios video service to continue to increase. We also expect to incur costs related to the development of new products and services in mobile video and IoT. However, we expect to achieve certain cost efficiencies in 2016 and beyond as we continue to streamline our business processes with a focus on improving productivity and increasing profitability. Upon the closing of the sale of our local exchange business and related landline activities in California, Florida and Texas, we expect that our Wireline segment EBITDA margin and operating income margin will decline. We expect to continue to undertake initiatives, including headcount and organizational realignment initiatives, to address our cost structure to mitigate this impact to our consolidated margins. Cash Flow from Operations We create value for our shareowners by investing the cash flows generated by our business in opportunities and transactions that support continued profitable growth, thereby increasing customer satisfaction and usage of our products and services. In addition, we have used our cash flows to maintain and grow our dividend payout to shareowners. Verizon s Board of Directors increased the Company s quarterly dividend by 2.7% during 2015, making this the ninth consecutive year in which we have raised our dividend. Our goal is to use our cash to create long-term value for our shareholders. We will continue to look for investment opportunities that will help us to grow the business, acquire spectrum licenses (see Cash Flows from Investing Activities ), pay dividends to our shareholders and, when appropriate, buy back shares of our outstanding common stock (see Cash Flows from Financing Activities ). We expect to use the proceeds from the Frontier transaction to reduce our debt levels. We also remain committed to returning to our pre Wireless Transaction credit- rating profile in the 2018 to 2019 timeframe. Capital Expenditures Our 2016 capital program includes capital to fund advanced networks and services, including 4G LTE and Fios, the continued expansion of our core networks, including our IP and data center enhancements, and support for our copper-based legacy voice networks and other expenditures to drive operating efficiencies. The level and the timing of the Company s capital expenditures within these broad categories can vary significantly as a result of a variety of factors outside our control, including, for example, material weather events. We are replacing copper wire with fiber-optic cable which will not alter our capital program but should result in lower maintenance costs in the future. Capital expenditures were $17.8 billion in 2015 and $17.2 billion in We believe that we have significant discretion over the amount and timing of our capital expenditures on a Company-wide basis as we are not subject to any agreement that would require significant capital expenditures on a designated schedule or upon the occurrence of designated events. We expect capital expenditures in 2016, which will be primarily focused on adding capacity to our 4G LTE network in order to stay ahead of our customers increasing data demands, to be in the range of approximately $17.2 billion to $17.7 billion. This includes capital spending up to approximately $150 million for the properties to be sold to Frontier. Consolidated Results of Operations In this section, we discuss our overall results of operations and highlight items of a non- operational nature that are not included in our segment results. We have two reportable segments, Wireless and Wireline, which we operate and manage as strategic business units and organize by products and services. In Segment Results of Operations, we review the performance of our two reportable segments. On February 21, 2014, we completed the acquisition of Vodafone s indirect 45% interest in Verizon Wireless. As a result, for 2014 our results reflect our 55% ownership of Verizon Wireless through the closing of the Wireless Transaction and reflect our full ownership of Verizon Wireless from the closing of the Wireless Transaction through December 31, Corporate and other includes the operations of AOL and related businesses, unallocated corporate expenses, the results of other businesses, such as our investments in unconsolidated businesses, pension and other employee benefit related costs and lease financing. Effective January 1, 2014, we have also reclassified the results of certain businesses, such as development stage businesses that support our strategic initiatives, from our Wireline segment to Corporate and other. The impact of this reclassification was not material to our consolidated financial statements or our segment results of operations. Corporate and other also includes the historical results of divested operations and other adjustments and gains and losses that are not allocated in assessing segment performance due to their non- operational nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses that are not individually significant are included in all segment results as these items are included in the chief operating decision maker s assessment of segment performance. We believe that this presentation assists users of our financial statements in better understanding our results of operations and trends from period to period. On July 1, 2014, our Wireline segment sold a non- strategic business (see Acquisitions and Divestitures ). Accordingly, the historical Wireline results for these operations, which were not material to our consolidated financial statements or our segment results of operations, have been reclassified to Corporate and other to reflect comparable segment operating results. The results of operations related to this divestiture included within Corporate and other are as follows: Years Ended December 31, Impact of Divested Operations Operating revenues $ $ 256 $ 599 Cost of services Selling, general and administrative expense 5 25

16 14 Verizon Communications Inc. and Subsidiaries Management s Discussion and Analysis of Financial Condition and Results of Operations continued Consolidated Revenues Increase/(Decrease) Years Ended December 31, vs vs Wireless Service $ 70,396 $ 72,630 $ 69,033 $ (2,234) (3.1)% $ 3, % Equipment 16,924 10,959 8,111 5, , Other 4,360 4,057 3, Total 91,680 87,646 81,023 4, , Wireline Mass Markets 18,473 18,047 17, Global Enterprise 12,943 13,649 14,156 (706) (5.2) (507) (3.6) Global Wholesale 5,979 6,190 6,560 (211) (3.4) (370) (5.6) Other (218) (40.1) Total 37,720 38,429 38,624 (709) (1.8) (195) (0.5) Corporate and other 3,444 2,144 2,113 1, Eliminations (1,224) (1,140) (1,210) (84) (5.8) Consolidated Revenues $ 131,620 $ 127,079 $ 120,550 $ 4, $ 6, Compared to 2014 The increase in consolidated revenues during 2015 was primarily due to higher equipment revenues in our Wireless segment, higher revenues as a result of the acquisition of AOL and higher Mass Markets revenues driven by Fios services at our Wireline segment. Partially offsetting these increases were lower Service revenues at our Wireless segment and lower Global Enterprise revenues at our Wireline segment. Wireless revenues increased $4.0 billion, or 4.6%, during 2015 primarily as a result of growth in equipment revenue. Equipment revenue increased by $6.0 billion, or 54.4% during 2015 as a result of an increase in device sales, primarily smartphones, under the Verizon device payment program, partially offset by a decline in device sales under traditional fixed-term service plans. Service revenue, which does not include recurring device installment billings related to the Verizon device payment program, decreased by $2.2 billion, or 3.1%, during 2015 primarily driven by an increase in the activation of devices purchased under the Verizon device payment program on plans with unsubsidized service pricing. The increase in these activations resulted in a relative shift of revenue from service revenue to equipment revenue and caused a change in the timing of the recognition of revenue. This shift in revenue was the result of recognizing a higher amount of equipment revenue at the time of sale of devices under the device payment program. During the year ended December 31, 2015, phone activations under the Verizon device payment program represented approximately 54% of retail postpaid phones activated compared to approximately 18% during During the fourth quarter of 2015, phone activations under the Verizon device payment program represented approximately 67% of retail postpaid phones activated. At December 31, 2015, approximately 29% of our retail postpaid phone connections participated in the Verizon device payment program compared to approximately 8% at December 31, At December 31, 2015, approximately 42% of our retail postpaid phone connections were on unsubsidized service pricing. Service revenue plus recurring device installment billings related to the Verizon device payment program increased 2.0% during Retail postpaid connection net additions decreased during 2015 primarily due to a decrease in retail postpaid connection gross additions, partially offset by a lower retail postpaid connection churn rate. Retail postpaid connections per account increased as of December 31, 2015 compared to December 31, 2014, primarily due to increases in Internet devices. Wireline s revenues decreased $0.7 billion, or 1.8%, during 2015 primarily as a result of declines in Global Enterprise, partially offset by higher Mass Markets revenues driven by Fios services. Mass Markets revenues increased $0.4 billion, or 2.4%, during 2015 primarily due to the expansion of Fios services (voice, internet and video), including our Fios Quantum offerings, as well as changes in our pricing strategies, partially offset by the continued decline of local exchange revenues. Global Enterprise revenues decreased $0.7 billion, or 5.2%, during 2015 primarily due to lower voice services and data networking revenues, lower networking solutions revenues, a decline in customer premise equipment revenues and the negative impact of foreign exchange rates. Corporate and other revenues increased $1.3 billion, or 60.6%, during 2015 primarily as a result of the acquisition of AOL, which was completed on June 23, Compared to 2013 The increase in consolidated revenues during 2014 was primarily due to higher revenues at Wireless, as well as higher Mass Markets revenues driven by Fios services at our Wireline segment. Partially offsetting these increases were lower Global Enterprise Core and Global Wholesale revenues at our Wireline segment. Wireless revenues increased $6.6 billion, or 8.2%, during 2014 primarily as a result of growth in service revenue and equipment revenue. The increase in service revenue, which does not include recurring equipment installment billings related to the Verizon device payment program, during 2014 was primarily driven by higher retail postpaid service revenue, which increased largely as a result of an increase in retail postpaid connections as well as the continued increase in penetration of 4G LTE smartphones and tablets through our More Everything plans. Retail postpaid connection net additions increased during 2014 primarily due to an increase in retail postpaid connection gross additions partially offset by an increase in our retail postpaid connection churn rate. Retail postpaid connections per account increased as of December 31, 2015 compared to December 31, 2014 primarily due to the increased penetration of tablets. Equipment revenue increased during 2014 primarily due to an increase in device sales under both traditional fixed-term service plans and the Verizon device payment program. Wireline s revenues decreased $0.2 billion, or 0.5%, during 2014 primarily as a result of declines in Global Enterprise Core and Global

17 Verizon Communications Inc. and Subsidiaries 15 Management s Discussion and Analysis of Financial Condition and Results of Operations continued Wholesale, partially offset by higher Mass Markets revenues driven by Fios services and increased Strategic services revenues within Global Enterprise. Mass Markets revenues increased $0.7 billion, or 3.8%, during 2014 primarily due to the expansion of Fios services (voice, internet and video), including our Fios Quantum offerings, as well as changes in our pricing strategies, partially offset by the continued decline of local exchange revenues. Global Enterprise revenues decreased $0.5 billion, or 3.6%, during 2014 primarily due to lower voice services and data networking revenues, the contraction of market rates due to competition and a decline in Core customer premise equipment revenues. This decrease was partially offset by an increase in Strategic services revenues, primarily due to growth in our application services, such as our cloud and data center offerings and contact center solutions. Global Wholesale revenues decreased $0.4 billion, or 5.6%, during 2014 primarily due to a decline in data revenues driven by the continuing demand for high-speed digital data services from fiberto-the-cell customers upgrading their core data circuits to Ethernet facilities, as well as a decline in traditional voice revenues. During 2014, we also experienced a decline in domestic wholesale connections. Consolidated Operating Expenses Increase/(Decrease) Years Ended December 31, vs vs Cost of services $ 29,438 $ 28,306 $ 28,534 $ 1, % $ (228) (0.8)% Wireless cost of equipment 23,119 21,625 16,353 1, , Selling, general and administrative expense 29,986 41,016 27,089 (11,030) (26.9) 13, Depreciation and amortization expense 16,017 16,533 16,606 (516) (3.1) (73) (0.4) Consolidated Operating Expenses $ 98,560 $ 107,480 $ 88,582 $ (8,920) (8.3) $ 18, Consolidated operating expenses decreased during 2015 primarily due to non- operational credits recorded in 2015 as compared to non- operational charges recorded in 2014 (see Other Items ). Consolidated operating expenses increased during 2014 primarily due to non- operational charges recorded in 2014 as compared to non- operational credits recorded in 2013 (see Other Items ) as well as increased operating expenses at Wireless Compared to 2014 Cost of Services Cost of services includes the following costs directly attributable to a service: salaries and wages, benefits, materials and supplies, content costs, contracted services, network access and transport costs, customer provisioning costs, computer systems support, and costs to support our outsourcing contracts and technical facilities. Aggregate customer care costs, which include billing and service provisioning, are allocated between Cost of services and Selling, general and administrative expense. Cost of services increased during 2015 primarily due to an increase in costs as a result of the acquisition of AOL, higher rent expense as a result of an increase in wireless macro and small cell sites, higher wireless network costs from an increase in fiber facilities supporting network capacity expansion and densification, including the deployment of small cell technology, a volume- driven increase in costs related to the wireless device protection package offered to our customers as well as a $0.5 billion increase in content costs at our Wireline segment. Partially offsetting these increases were a $0.3 billion decline in employee costs and a $0.3 billion decline in access costs at our Wireline segment. Also offsetting the increase was a decrease in Cost of services reflected in the results of operations related to a non- strategic Wireline business that was divested on July 1, Wireless Cost of Equipment Wireless cost of equipment increased during 2015 primarily as a result of an increase in the average cost per unit, driven by a shift to higher priced units in the mix of devices sold, partially offset by a decline in the number of units sold. Selling, General and Administrative Expense Selling, general and administrative expense includes: salaries and wages and benefits not directly attributable to a service or product, bad debt charges, taxes other than income taxes, advertising and sales commission costs, customer billing, call center and information technology costs, regulatory fees, professional service fees, and rent and utilities for administrative space. Also included is a portion of the aggregate customer care costs as discussed in Cost of Services above. Selling, general and administrative expense decreased during 2015 primarily due to non- operational credits, primarily severance, pension and benefit credits, recorded in 2015 as compared to non- operational charges, primarily severance, pension and benefit charges, recorded in 2014 (see Other Items ). Also contributing to this decrease was a decline in sales commission expense at our Wireless segment, which was driven by an increase in activations under the Verizon device payment program. The decrease is partially offset by an increase in bad debt expense at our Wireless segment. The increase in bad debt expense was primarily driven by a volume increase in our installment receivables, as the credit quality of our customers remained consistent throughout the periods presented. Depreciation and Amortization Expense Depreciation and amortization expense decreased during 2015 primarily due to $0.9 billion of depreciation and amortization expense not being recorded on our depreciable Wireline assets in California, Florida and Texas which were classified as held for sale as of February 5, 2015, partially offset by an increase in depreciable assets at our Wireless segment. We will not record depreciation and amortization expense on our depreciable Wireline assets in California, Florida and Texas through the closing of the transaction with Frontier, which is expected to occur at the end of the first quarter of 2016.

18 16 Verizon Communications Inc. and Subsidiaries Management s Discussion and Analysis of Financial Condition and Results of Operations continued 2014 Compared to 2013 Wireless Cost of Equipment Wireless cost of equipment increased during 2014 primarily due to an increase in cost of equipment sales at our Wireless segment as a result of an increase in the number of devices sold as well as an increase in the cost per unit. Selling, General and Administrative Expense Selling, general and administrative expense increased during 2014 primarily due to non- operational charges, primarily severance, pension and benefit charges, recorded in 2014 as compared to non- operational credits, primarily severance, pension and benefit credits, recorded in 2013 (see Other Items ). Depreciation and Amortization Expense Depreciation and amortization expense decreased during 2014 primarily due to a decrease in net depreciable assets at our Wireline segment, partially offset by an increase in depreciable assets at our Wireless segment. Non- operational (Credits) Charges Non- operational (credits) charges included in operating expenses (see Other Items ) were as follows: Years Ended December 31, Severance, Pension and Benefit (Credits) Charges Selling, general and administrative expense $ (2,256) $ 7,507 $ (6,232) Gain on Spectrum License Transactions Selling, general and administrative expense (254) (707) (278) Other Costs Cost of services and sales 27 Selling, general and administrative expense Total non- operating (credits) charges included in operating expenses $ (2,510) $ 7,134 $ (6,510) See Other Items for a description of these and other nonoperational items. Consolidated Operating Income and EBITDA Consolidated earnings before interest, taxes, depreciation and amortization expenses (Consolidated EBITDA) and Consolidated Adjusted EBITDA, which are presented below, are non-gaap measures and do not purport to be alternatives to operating income as a measure of operating performance. Management believes that these measures are useful to investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as they exclude the depreciation and amortization expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. Consolidated EBITDA is calculated by adding back interest, taxes, depreciation and amortization expense, equity in (losses) earnings of unconsolidated businesses and other income and (expense), net to net income. Consolidated Adjusted EBITDA is calculated by excluding the effect of non- operational items and the impact of divested operations from the calculation of Consolidated EBITDA. Management believes that this measure provides additional relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management s evaluation of business performance. See Other Items for additional details regarding these non- operational items. Operating expenses include pension and benefit related credits and/or charges based on actuarial assumptions, including projected discount rates and an estimated return on plan assets. These estimates are updated in the fourth quarter to reflect actual return on plan assets and updated actuarial assumptions. The adjustment has been recognized in the income statement during the fourth quarter or upon a remeasurement event pursuant to our accounting policy for the recognition of actuarial gains/losses. It is management s intent to provide non-gaap financial information to enhance the understanding of Verizon s GAAP financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-gaap financial measure is presented along with the corresponding GAAP measure so as not to imply that more emphasis should be placed on the non-gaap measure. The non-gaap financial information presented may be determined or calculated differently by other companies. Years Ended December 31, Consolidated Operating Income $ 33,060 $ 19,599 $ 31,968 Add Depreciation and amortization expense 16,017 16,533 16,606 Consolidated EBITDA 49,077 36,132 48,574 Add (Less) Non- operating (credits) charges included in operating expenses (2,510) 7,134 (6,510) Less Impact of divested operations (12) (43) Consolidated Adjusted EBITDA $ 46,567 $ 43,254 $ 42,021 The changes in Consolidated Operating Income, Consolidated EBITDA and Consolidated Adjusted EBITDA in the table above were primarily a result of the factors described in connection with operating revenues and operating expenses.

19 Verizon Communications Inc. and Subsidiaries 17 Management s Discussion and Analysis of Financial Condition and Results of Operations continued Other Consolidated Results Equity in Earnings of Unconsolidated Businesses Equity in earnings of unconsolidated businesses decreased $1.9 billion during 2015 and increased $1.6 billion during 2014 primarily due to the gain of $1.9 billion recorded on the sale of our interest in Vodafone Omnitel N.V. (the Omnitel Transaction, and such interest, the Omnitel Interest) during the first quarter of 2014, which was part of the consideration for the Wireless Transaction completed on February 21, Other Income and (Expense), Net Additional information relating to Other income and (expense), net is as follows: Increase/(Decrease) Years Ended December 31, vs vs Interest income $ 115 $ 108 $ 64 $ 7 6.5% $ % Other, net 71 (1,302) (230) 1,373 nm (1,072) nm Total $ 186 $ (1,194) $ (166) $ 1,380 nm $ (1,028) nm nm - not meaningful Other income and (expense), net changed favorably during 2015 and changed unfavorably during 2014 primarily driven by net early debt redemption costs of $1.4 billion incurred in 2014 (see Other Items ). Interest Expense Increase/(Decrease) Years Ended December 31, vs vs Total interest costs on debt balances $ 5,504 $ 5,291 $ 3,421 $ % $ 1, % Less capitalized interest costs (378) (50.1) Total $ 4,920 $ 4,915 $ 2,667 $ $ 2, Average debt outstanding $ 113,325 $ 108,461 $ 65,959 Effective interest rate 4.9% 4.9% 5.2% Total interest costs on debt balances increased during 2015 primarily due to a $4.9 billion increase in average debt (see Consolidated Financial Condition ). Capitalized interest costs were higher in 2015 primarily due to an increase in wireless licenses that are currently under development, which was a result of our winning bid in the FCC spectrum license auction during The FCC granted us those wireless licenses on April 8, 2015 (see Note 2 for additional information). Total interest costs on debt balances increased during 2014 primarily due to the issuance of fixed and floating rate notes to finance the Wireless Transaction (see Acquisitions and Divestitures ) resulting in an increase in average debt and a corresponding increase in interest expense, partially offset by a lower effective interest rate (see Consolidated Financial Condition ). Capitalized interest costs were lower in 2014 primarily due to a decrease in wireless licenses that are currently under development, which was due to the deployment of AWS licenses for commercial service during 2014.

20 18 Verizon Communications Inc. and Subsidiaries Management s Discussion and Analysis of Financial Condition and Results of Operations continued Provision for Income Taxes Increase/(Decrease) Years Ended December 31, vs vs Provision for income taxes $ 9,865 $ 3,314 $ 5,730 $ 6,551 nm $ (2,416) (42.2)% Effective income tax rate 34.9% 21.7% 19.6% nm - not meaningful The effective income tax rate is calculated by dividing the provision for income taxes by income before the provision for income taxes. The effective income tax rate for 2015 was 34.9% compared to 21.7% for The increase in the effective income tax rate and provision for income taxes was primarily due to the impact of higher income before income taxes due to severance, pension and benefit credits recorded in 2015 compared to severance, pension and benefit charges recorded in 2014, as well as tax benefits associated with the utilization of certain tax credits in 2014 in connection with the Omnitel Transaction. The 2014 effective income tax rate also included a benefit from the inclusion of income attributable to Vodafone s noncontrolling interest in the Verizon Wireless partnership prior to the Wireless Transaction completed on February 21, The effective income tax rate for 2014 was 21.7% compared to 19.6% for The increase in the effective income tax rate was primarily due to additional income taxes on the incremental income from the Wireless Transaction completed on February 21, 2014 and was partially offset by the utilization of certain tax credits in connection with the Omnitel Transaction in 2014 and the effective income tax rate impact of lower income before income taxes due to severance, pension and benefit charges recorded in 2014 compared to severance, pension and benefit credits recorded in The decrease in the provision for income taxes was primarily due to lower income before income taxes due to severance, pension and benefit charges recorded in 2014 compared to severance, pension and benefit credits recorded in Our effective income tax rate differed significantly from the statutory federal income tax rate for 2013 due to the inclusion of income attributable to Vodafone s noncontrolling interest in the Verizon Wireless partnership for the full year within our income before the provision for income taxes. In 2013, we recorded a tax provision on income before the provision for income taxes and when we included the income attributable to Vodafone s noncontrolling interest in the Verizon Wireless partnership in our income before the provision for income taxes it resulted in our effective income tax rate being 13.7 percentage points lower during A reconciliation of the statutory federal income tax rate to the effective income tax rate for each period is included in Note 12 to the consolidated financial statements. Net Income Attributable to Noncontrolling Interests Increase/(Decrease) Years Ended December 31, vs vs Net income attributable to noncontrolling interests $ 496 $ 2,331 $ 12,050 $ (1,835) (78.7)% $ (9,719) (80.7)% The decrease in Net income attributable to noncontrolling interests during 2015 and 2014 was primarily due to the completion of the Wireless Transaction on February 21, As a result, our results reflect our 55% ownership interest of Verizon Wireless through the closing of the Wireless Transaction and reflect our full ownership of Verizon Wireless for the remainder of the year. The noncontrolling interests that remained after the completion of the Wireless Transaction primarily relate to wireless partnership entities.